Markets
The ECB promised but did not deliver (yet) yesterday. There will be more stimulus: a rate cut will probably come as soon as September which is likely to be accompanied by a tiered deposit system. The ECB is also looking into options for revamping quantitative easing but Draghi didn’t want to elaborate on that. Click here for a detailed review. However, investors have been frontrunning more easing quite a lot and were hoping for acts rather than just words. Bond yields suffered knee-jerk losses after the policy statement announcing more stimulus, but rebounded during the press conference. The German 10-yr yield touched a new low at -0.42% but finished at -0.36% (+1.5 bp). Other maturities added 1.8 (2-yr) to 3.1 (30-yr) bps. Peripheral spreads were unchanged. Solid US data and Draghi spill-overs triggered a bear flattening of the US yield curve, with daily changes varying from 4.7 bps (2-yr) to 3.7 bps (10-yr). The focus today will be on US GDP growth for Q2. Markets anticipate a rather soft 1.8% QoQa growth. Net trade might have contributed negatively but we believe that ‘core’ GDP growth (investment, consumption) will be at the higher end of expectations. The latter is key for markets. Decent to strong fundamentals will further erode odds of a 50 bps rate cut by the Fed next week, which could cause outperformance of US Treasuries vs. the German Bund today.
FX markets traded similarly to bond markets yesterday. EUR/USD traded muted ahead of the ECB before slipping near the crucial 1.11 support after the policy statement got published. However, as was the case in bonds, ECB frontrunners were forced to reposition. EUR/USD jumped higher in the 1.11 big figure but closed the session little changed at 1.1147. The EUR/USD performance was mainly driven by the ECB story. At the same time, USD/JPY performed rather strong, especially considering the correction on global equity markets. Strong US durable orders data probably reinforced the view that it is too early for aggressive Fed easing next week, supporting the dollar. USD/JPY closed the session at 108.63 (from 108.19). Today, the focus for FX trading turns from the euro to the dollar. Headline US GDP growth will probably print rather soft, but the underlying story might remain constructive. In theory, this narrative might be (slightly) supportive for the dollar. However, it probably won’t be enough for markets to scale back Fed easing expectations further out in time. Yesterday, the EUR/USD 1.11 range bottom again proved to be very solid. We assume that today’s US data won’t be strong enough for a break beyond this level. The established 1.11/1.13 range might survive in the run-up to next week’s Fed meeting.
Freshly sworn in PM Johnson held a first Parliamentary debate with its new cabinet yesterday. The most important takeaway was him again demanding the removal of the Irish backstop from the current Brexit deal and pledging the UK would leave the EU on October 31 without a deal if necessary. Concrete steps on his approach were absent. EUR/GBP trading therefore mainly found inspiration with the ECB. The couple slipped to an intraday low of 0.89 but soon recovered on euro strength post ECB, although some sterling weakness could have played part as EU officials called Johnson’s backstop demand “unacceptable”. The couple eventually closed higher in the mid 0.89’s. With an empty UK/EMU calendar, there’s little to inspire sterling investors today. We hold our neutral bias on the pound as markets await the first Brexit negotiations. Trading is likely to be technically in nature.
News Headlines
The US House of Representatives passed the spending and debt limit bill announced by president Trump earlier this week. The legislation – which raises federal budget spending and suspends debt limits over the next two years – is now heading for the Senate to be debated next week.
PM Sanchez did not receive enough support for his bid to become Spain’s next PM during a second vote yesterday as he failed to convince the far-left Podemos. Sanchez refuses to “throw in the towel” however, saying he will continue to talk with the three largest opposition parties to unblock the impasse.
